Magic Numbers

I get really jazzed up at this time of year. Some of it is the magic of springtime, green grass, cycling again, robins chirping. But mostly it is because baseball is back. Baseball conjures up in me many things. Partly it is the memory of “having a catch” with my dad (and continuing the custom with my kids). Some is the love of the teams and the rivalries (Red Sox vs. Yankees and Cubs vs. Cardinals).

A lot of what we love is related to the ways that we can follow baseball. Sure, a day at Fenway or Wrigley can be a memorable event. Following the box scores in the paper or watching SportsCenter can stoke the habit. But in the end, baseball is a complicated game, full of arcane rules and strange rituals. One way to make it easier to understand is to break it down into numbers. Everyone knows about batting averages and ERA. If you are really into baseball, you might know PECOTA, OPS and SLG. These stats help us to visualize, compare and project a team’s future.

In business, as well, we can use stats to help us understand where things are going. I like to talk about these as Magic Numbers. Everyone is familiar with the biggies — Net Profit Percent, Average Ticket for a restaurant, Return on Investment, Debt to Equity ratio, P/E Ratio. But every business has (or should have) some specific measures that are important to its health. These should be easy to calculate, presented on a regular basis (daily or weekly) and help the manager to forecast where the business is going.

For example, when I was running my consulting company, we had a few numbers that we tracked weekly. They included Cash in Bank, Average A/R Days, Utilization %, Sales Pipeline and Backlog $. Some of these were trailing stats; that is, they told us of what had already happened — Cash, Avg. A/R Days and Utilization fell into this category. Pipeline and Backlog were leading indicators. Pipeline told us how many deals we had in play for how much and when they were expected to close. We used an expected value (Expected % of Close * Dollar Value) as a tracking mechanism. Backlog told us how much work we had on our books that was signed by the client, but was not performed yet. We needed to keep backlog increasing through sales at a reasonable rate. The working off of the backlog would take care of itself; every week people were decreasing it.

Norm Brodsky, an entrepreneur and columnist at Inc. Magazine wrote about his use of Magic Numbers and how the practice allowed him to forecast a downturn in his business.

Sometimes Magic Numbers can be developed that will help you understand your market, while measuring things totally outside of your sphere of control. There are stories about people who count the number of cars in a mall parking lot to determine if their restaurant’s prognosis is up or down.

So, the question is do you employ magic numbers in your management process and if so, what types help you to forecast the health of your business?